Tax Debts – Not Your Typical Creditor
It doesn’t take long to figure out that the IRS (federal taxes) and the FTB (California state taxes), are unique creditors. Even in bankruptcy, these debts usually take priority over other general unsecured debts (like credit cards).
Typical Causes of Unpaid Tax Debt:
- Failure to withhold sufficient funds from income;
- Withdrawal of funds from retirement accounts;
- Sale of stocks or other investments;
- Cancellation of debt (COD) income; or
- [For Businesses] Failure to remit payroll withholdings from your employees’ pay.
Your Options:
- Enter into a Voluntary Repayment Plan (if the IRS/FTB is willing);
- Pursue an Offer In Compromise;
- File Bankruptcy, and either a) discharge the debt (if possible), or b) repay the debt over the term of a chapter 13 plan;
- Challenge the amount you owe (if you have a basis to do so); or
- Ignore the problem, and wait for the IRS/FTB to garnish your wages, levy your bank account, and seize other assets (such as your tax refund).
You’ll notice the last alternative, is clearly the worst option. That’s because ignoring your tax problem will not make it go away. Also, failing to file your tax returns will only make your problems worse. In fact, having failed to file your returns might force you to pay tax debt that could have been wiped out in bankruptcy.
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In Bankruptcy:
You do have options outside of bankruptcy, and they may actually present an better alternative. But your first step is to at least figure out which alternatives are actually options for you. In certain instances bankruptcy can actually allow certain older tax debts to be entirely discharged. And newer tax debts can be stretched out over a repayment period, while subordinating any penalties assessed.
If You Are Considering Bankruptcy, You May Be Able To Address Other Issues At the Same Time
- Prevent Foreclosure;
- Cure Mortgage Arrears;
- Remove Judgment Liens, which impair the homestead exemption;
- Sell Distressed Property;
- Stop Garnishments;
- Stop Lawsuits and Levies; or
- Modify a Vehicle Loan.
Free Consultation – What To Expect.
If you consult with a qualified bankruptcy attorney, your attorney should be able to quickly explain the following:
- the available bankruptcy options (chapter 7 vs. 13, or chapter 11),
- whether you qualify for bankruptcy and whether you should file, and
- the likely benefits that bankruptcy may offer (see examples, above).
